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There is a way to protect unsophisticated Canadian investors who involve themselves in "crowdfunding" projects. You simply need standardized, easy-to-understand regulations.

That's the argument from Toronto-based MaRS Discovery District innovation hub, which works with Canadian startups to help them grow. It's sending that message to the Ontario Securities Commission, answering a call for comment issued in mid-December after the OSC said it would consider letting small companies raise funds on the Internet.

Since then, several groups have urged the OSC to approve regulatory exemptions for crowdfunded capital. The latest was Interactive Ontario, which said Thursday that Canada could gain a competitive advantage over the U.S. if it moves quickly enough.

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To gather feedback on the exemption idea, MaRS held a stakeholder event in February attended by the OSC, entrepreneurs and the centre's investors. Because Canadian companies draw just 44 per cent of the venture capital allocated in the U.S., many of the attendees agreed the country's startups could use a little more angel investment, and said crowdfunding would improve their access to capital.

But MaRS also made it very clear in its comments submission that these investors must be protected from fraud, and the easiest way to do that is to keep things simple. Standardizing rules and forms, both for website portals as well across the provinces, would best protect investors and enable projects to reach the scale necessary to succeed.

On top of simplicity, MaRS support came with other recommendations (some of which were outlined by the OSC) for how to balance realistic capital costs for small- and medium-sized businesses with investor protection against fraud.

Here are some of MaRS' top priorities:

  • Anyone who wants to invest in a crowdfunded project needs to sign a standardized risk acknowledgment form
  • There should be a dollar contribution limit for non-accredited investors only
  • The crowdfunding website should be registered
  • The website should also be responsible for giving investors information, describing risks and checking that company managers have been vetted for criminal background checks and bankruptcy claims
  • Investors should get a two business day cool-off period to pull out of their commitment
  • Crowdfunding sites should be encouraged to use a third-party system so underfunded projects can quickly return the cash. This is called the “escrow approach”
  • The website portal should consider setting an expiry date associated with crowdfunding offers

(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)

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